Second Income Can Shrink With Taxes and Expenses

By , Staff writer of The Christian Science Monitor

A FAMILY faced with caring for a child or elderly parent can have some tough choices to make. One of the most important is whether both spouses will continue to work.

Couples must consider both the short-term and long-term impact this decision will make on the family, says Dickinson Miller, managing principal of IDS Financial Services in Washington.

``For planning a short-term, four- to five-year period of one income, it becomes a budgetary exercise,'' Mr. Miller says. Families need to examine their discretionary income (income not already allocated for debt, bills, food, etc.) and examine costs that can be cut out.

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Although many people figure that two incomes are necessary to keep a family afloat, Amy Dacyczyn, author of a penny pincher's guide, ``The Tightwad Gazette'' (Villard Books, 1993), says that is a common misperception. She urges readers to calculate the net worth of a second income.

For example: ``A $15,000 income loses about 12 percent to federal and state income taxes, and Social Security,'' Ms. Dacyczyn writes. ``A $25,000 income has about 18 percent withheld. But as these two incomes combine, our couple moves into a higher tax bracket. A $40,000 income has about 22 percent withheld.

``In reality, what this means is that the $25,000 loses 27 percent to the tax bite. To determine this, I figured the couple's taxes with a $40,000 income and a $25,000 income. The difference is then subtracted from the $15,000 income. When the difference is subtracted from $15,000, the net is $10,878,'' Dacyczyn continues.

After subtracting the costs of day care or elder care, transportation, a professional wardrobe, and conveniences (such as meals out or for services that could otherwise be done at home), the net worth of the second income shrinks even further.

``If you both love your jobs ... great,'' Dacyczyn says. ``But if you would like to work less or leave your job altogether, an evening with a calculator may turn up a pleasant surprise.''

Although an additional income will bump the family into a higher tax bracket, ``if, after all the taxes, [a family] can still put $400 to $500 a month in a savings plan, it may be worth [keeping two incomes],'' says Marysue Wechsler, the director of finance at Acacia Financial Center in Greenbelt, Md., and the president of the Institute of Certified Financial Planners in Denver.

But families also need to consider that a second income may not bring in that much more additional money to make keeping the second job worthwhile, she says.

Sometimes, the decision to stay employed is based on the benefits, such as medical insurance, she adds. And that means that sometimes women can't afford not to work.

But the choice to drop out of the work force may be risky, particularly for women, who are generally the ones who earn the ``second income'' or provide child care or elder care, says Judith Mueller, executive director of the Women's Center in Vienna, Va. With divorce and single-parenting common, women can find themselves at a disadvantage when trying to reenter the work force.

``It's harder to jump back in if you're totally removed from the world of work,'' Ms. Mueller says. ``You're not doing regular networking. You're not producing a product [or a service] that has a date attached to it ... that is current.

``It's suicidal to say: `I'm just going to drop out,' knowing ... the economic consequences of removing oneself in a competitive job market.''

But Mueller says the Women's Center does not recommend that a woman choose to go back to work for less than $40,000 a year in the Washington area. (Day-care costs here run about $6,000 a year for a single child, she says.) Mueller admits this presents a dilemma: It is not profitable for a woman to work if she is caring for a parent or child, yet it can also be costly for her not to work.

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